The Cost of ?s Surface Combatants: The PBO's 2021 Update and Options Analysis

Comments and Considerations from the Naval Association of Canada

March 2021

In early February, the Naval Association of Canada PBO, who has produced a realistic and sophisticated (NAC) released an in-depth research paper outlining cost analysis, but rather to re-emphasise the layers of the inherent complexities of costing and comparing complexity and uncertainty in shipbuilding and to shipbuilding projects. The focus of the paper was the provide context to assist readers in their evaluation of Canadian Surface Combatant (CSC) Project, which is the Report. now garnering considerable attention in the wake of the recent Parliamentary Budget Officer (PBO) Report.1 The NAC?s aim was to highlight both the The PBO Report - Overview broader strategic value and economic advantages of The PBO?s Report on the CSC was prepared in domestic shipbuilding and the challenges of response to a request from the House of Commons comparing different warship designs. In doing so, the Standing Committee on Government Operations and intent was to offer a more holistic understanding of Estimates. The assigned task was to examine the cost Canada?s approach to shipbuilding and the CSC of the existing CSC Project to replace both the current Project. fleet of 12 Halifax-class and three Now that the PBO has released cost estimates and Iroquois-class with a new fleet of 15 comparisons between the CSC and other warship multi-purpose warships, based on the BAE Global 2 designs, the NAC would like to comment on certain Combat Ship (GCS) design and to cost compare two assumptions and conclusions within that Report. As other designs ? the US Navy Constellation-class with our past work, the intent is not to criticize the , based on the FREMM European

1 multi-mission frigate, and the British Type 31e counterpiracy operations, escort duties, and presence general-purpose frigate based on the Danish Iver missions.?4 While the CSC will also need to Huitfeldt design. While such comparisons may appear undertake ?low-end? constabulary missions, the appropriate to the layman, it is the NAC?s opinion rationale underpinning the Navy itself is its ability to that they are of marginal value to the overall conduct full spectrum maritime operations, which discussion. The CSC Project is already too far along include the ability to engage in combat operations. in the development process to consider an abrupt halt The PBO?s CSC costing estimate, which is an and a shift to a new platform. The significant costs update on that undertaken in 2019,5 indicates a $7.5 that have already been incurred, combined with the billion increase in the Project?s overall budget, owing additional costs of contract cancellations, and the largely to updates in the ship?s specifications and major disruption to the project schedule would be too timelines. While the PBO?s costing analysis appears severe. Canada does not need a repeat of the Maritime both thorough and fair, the CSC build complexity and Helicopter Project. requirements reconciliation effort have been It should be noted that while a capabilities underestimated. Canada's history working with the comparison was purposefully excluded from the CSC Project has shown how much time and cost is PBO?s work, the report was clear that it recognized involved making alterations to even a cutting-edge the ?differences in capabilities? between the various design. Additionally, the idea that the timeframe for ship designs.3 This omission is critical to the selection of a new design could be shortened is understanding the complexity of the comparisons and simply unrealistic. Canada lacks the necessary staff to evaluating the Report. In order to be relevant in undertake that work on a condensed schedule, while international affairs, Canada needs a versatile fleet of simultaneously continuing the ongoing CSC Project high-end naval combatants that are capable of activities. If the Department of National Defence ?maritime security, counter-terrorism and (DND) had the capacity to complete that work faster,

2 it would have done so on the current Type 26 design industrial team to achieve Canada?s stringent modifications. requirements in support of the Industrial and PBO Scenario One - Recompete and Replace Technological Benefits (ITB) and Value Proposition the T26 Design (VP) policy. None of the costs associated with these contractual commitments appear to have been Following the cost analyses depicted above, the considered in the PBO?s cost comparisons. PBO Report then presents two scenarios, each with two options, for consideration. The first scenario A fleet of 15 US FREMM warships is costed by entails stopping the design and procurement activity the PBO at $71.1 billion ? roughly 9% less expensive on the current Type 26 design chosen by Canada in than 15 Type 26 and well within the PBO?s 6 2019 and initiating a new competitive procurement to self-defined 20% margin of error. However, a switch build either the US FREMM or the Type 31e. Given to the US FREMM would result in the loss of four or that the Type 26 design has more years of detailed options analysis and project already been deemed the definition work and would preferred solution, most closely stretch Canada?s fleet replacement program even aligned with Canada?s In the NAC?s view, the requirements, this raises serious further into the future. questions. How the switch from the Type 26 to Moreover, such a change would Government of Canada, which any new ship design would undoubtedly tax the values a fair, open, and Halifax-class frigates to the present significant risk for limit, and perhaps leave transparent process in all negligible potential returns. defence procurements, would Canada without a functioning endeavour to preclude the Type navy as those ships become 26 design from a subsequent obsolete before being replaced. competition is left unstated in The PBO explicitly excludes the PBO Report. Certainly, such action would present any costs arising from an interruption of production at 7 a real avenue for legal challenge by the current Irving Shipbuilding and among its subcontractors. industrial team and create a foundation for successful Yet any such delay would leave the shipyard and its litigation, with additional costs to all parties. suppliers with a multi-year gap in orders. The result would be the disbanding of a workforce which has In the NAC?s view, the switch from the Type 26 to been assembled and trained over many years and at any new ship design would present significant risk for considerable cost. It would also pose significant new negligible potential returns. While the US FREMM is risks associated with the inability to resume a close comparison to the Type 26/CSC design in that production efficiently after that workforce dispersed. it is a general-purpose frigate capable of conducting anti-air, anti-surface, and anti-submarine operations, While opting to switch to the Type 31e design at a there would be only a marginal savings in switching cost of $27.5 billion for a fleet of 15 (which is to that design. Those savings were also estimated by roughly 65% cheaper than the current CSC Project) the PBO without considering the demanding may have allure at a superficial level, the assumption contractual terms and conditions imposed on the Type that the Type 31e would be a suitable replacement is 26 team that proposed this design solution. These deeply flawed. First, The PBO?s cost estimates for terms, imposed by Canada, carry additional costs that ship are not from the but are associated with the commitments made by the based on the Danish build of the Iver Huitfeldt class

3 frigate, which was a largely commercial design by the modules. In the build process the Danish Odense Maritime Technology (OMT). Not only is the employed their StanFlex system,8 which allows for price comparison not founded on the unique Canadian change-out of modular systems and separates the cost requirements, including the CSC contractual terms of components (weapons and sensor packages) from and conditions, but in the previous competitive the overall cost estimates of the ship. In fitting out the solicitation OMT, despite qualifying as a CSC ships the Danes also reused older weapons from other Short-Listed Respondent, chose not to offer this ships. This is significant, as the combat systems of a design solution as a Lead Warship Designer. modern warship are typically the most expensive part Assuming a renewed interest by another commercial of the total ship package and they are also the primary firm to propose the Type 31e to Canada requires a driver of cost escalation. In essence, the Iver Huitfeldt significant leap of faith. class was built with relatively cheap labour using a In terms of combat capability, the PBO notes that fitted for (but not with) approach to weapons and the Type 31e possesses ?more modest capabilities.? sensors. Hence the construction and the associated This a profound understatement. Indeed, this class of costs are not comparable to any other purpose-built ship is not only less capable ? but likely incapable of warship. performing many of the tasks that are required of the The task of securing bids to provide a US CSC. A significant hull redesign would have to be FREMM or Type 31e replacement is also by no undertaken to accommodate the larger CSC crew size means certain. Canada's CSC Request for Proposals and other survivability requirements like damage in 2016 qualified only three bidders ? in part because control systems, gas-tight citadels, and fitted industry did not trust Canada to be a reliable degaussing coils. Designed as a ?light frigate? or even customer. Changing tack at this point and after so a well armed patrol ship, the Type 31e does not have many years and so much investment by previous significant weapons capacity built into the design and bidders would be hard to overcome and could damage was never intended to carry the full suite of sensors Canada?s reputation further. Which firm would invest and weapons that the RCN has long identified as a the millions of dollars needed to prepare the bid that basic requirement. The projected crew size (of around would offer the Type 31e or a US FREMM? 100) is also much smaller than the current projected CSC crew of 204. That smaller complement will leave the ship unable to undertake continuous The Mixed Fleet Scenarios operations ? an essential requirement in sustained The PBO?s second scenario suggests switching to combat situations. Virtually all Type 31e sensor and a mixed fleet of Type 26 and US FREMM or Type weapon systems would have to be replaced, and new 31e warships. In addition to all of the concerns systems sourced, evaluated and integrated into the outlined above, in this scenario the Navy would be combat system. Unlike the Type 26 and US FREMM forced to continue the redesign process on the designs, this lighter warship would have to be existing CSC Project while undertaking an entirely radically augmented to meet Canadian requirements, new set of modifications. In the case of the CSC or the requirements would have to be completely Project, most of this work is already being done, not re-written to accommodate a less capable platform. by DND, but by engineers at Irving Shipbuilding. The reliability of the Type 31e costing is also With DND and industry running at capacity, sourcing somewhat suspect. The Iver Huitfeldt class was not the expertise for the second team, required to progress actually built in Denmark, but rather was constructed this work on a second design, would be a significant in blocks in Estonia and Lithuania, and then challenge ? likely leading to additional cost inflation transported to Denmark for assembly and fit out of and delay. In the Naval Association?s opinion, the possibility of achieving a satisfactory outcome in four

4 years as the PBO has suggested, is extremely remote. considerable delay caused by switching to a different Additionally, switching to a second design as part design. The already significant sunk costs accrued of a mixed fleet would lead to missed opportunities thus far, compounded by a delay to the project of four for efficiencies and cost savings. Shipyards enjoy a or more years, would result in little if any real learning curve as they progress with a building benefits. Moreover, all aspects of Canada?s terms and program.9 Typically over time, efficiencies improve, conditions including the ITB/VP policy, and the and costs go down. A hybrid fleet would reset that significant legal implications, would all have to be learning curve after completion of Type 26 design factored into such a bold move. In the case of the US hull number three before the switch to a US FREMM FREMM design only marginal cost savings would be or Type 31e design. achieved. Similarly, a switch to a fleet of Type 31e warships would be strategically ill-advised in that it A mixed fleet would also require DND to support would leave Canada with a navy incapable of two separate classes of major combatants. This would performing most of its critical combat functions. create added administrative, logistical, and maintenance burdens and limit the possibility of cost Since the PBO Report was released on 24 savings by buying in bulk. The mixed fleet approach February there has been a litany of commentary from would also create longer-term challenges in terms of the media and various ?experts? in this domain crewing and training inefficiencies for operators and regarding the supposedly upward spiralling cost of the engineers. Operating two classes of ships would CSC Project. In the NAC?s opinion this could have necessitate different training requirements and ashore been avoided if DND had been forthright in support infrastructure.10 Initially the CSC Project explaining the circumstances, context, and validity of envisioned a mixed fleet of two different variants its initial costing of the project and had (Task Group Command/Air Defence and General communicated to all concerned more information on Purpose). However, the RCN dismissed this approach the status of the project as it progressed. for precisely these reasons. In conclusion, while the Naval Association congratulates the PBO for its exemplary work, we have serious reservations regarding the scenarios and Conclusion potential options presented to Government. While Canada is a maritime nation, dependant upon the cost is important, so too is capability. We are pleased free flow of goods across the world?s seas and the to be able to contribute this additional layer of security provided by our maritime alliances. All operational and strategic context and add some Canadians should recognise that the Canadian Surface additional clarity to this most important investment by Combatant ships, when they enter service, will be Canada. making a significant contribution to Canada?s defence and security, by enhancing global stability, advancing Canadian values and interests, and helping to ensure our economic prosperity for the next 40 years. The CSC Project is the most expensive government acquisition in this country?s history. Despite the cost, we must maintain a combat-capable globally deployable navy. From an economic perspective, significant industrial disruption would result from the

5 Notes 1 Parliamentary Budget Office,?The Cost of Canada's Surface Combatants: 2021 Update and Options Analysis,? (2021). 2 In the UK the Global Combat Ship is known as the Type 26 frigate 3 Parliamentary Budget Office,?2021 Update,? 1. 4 Forecast International, ?Warship Forecast: Type 31,? (February 2021), 3. 5 Parliamentary Budget Office, ?The Cost of Canada?s Surface Combatants: 2019 Update? (2019). 6 Parliamentary Budget Office, ?2021 Update? 7 Ibid, 11. 8 Steve Wills, ?LCS Versus the Danish Strawman,? Centre for International Maritime Security (February 19, 2015). 9 Eric Lerhe, ?Fleet Replacement and the ?Build at Home? Premium,? Vimy Papers (Conference of Defence Associations, 2016), 10-11. 10 Christopher Nucci, ?The Future Canadian Surface Combatant,?Proceedings 146/11/1,413 (November 2020). Point of Contact Howie Smith Past President | Ottawa Branch, NAC Phone: (613) 286-8555 Email: [email protected]

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